Trade and Employment From Myths to Facts - International Labour ...

Chapter 3: Assessing the impact of trade on employment: Methods of analysis
scepticism in the eyes of the viewing public about virtually all models in virtually
all disciplines. The picture illustrated in this table is that of a vigorous competition
between modellers who believe that different aspects of an economy are of greatest
importance. It is then up to the policy-maker, not the analyst, to choose the model
deemed most appropriate to the policy question at hand.
Winchester (2008a) reviews 11 CGE studies of trade and wage inequality, including
Cline (2004). Despite a wide variation in factors, sectors and regions, as well
as trade scenarios considered, the models speak with one voice: the effect of trade
liberalization on the relative skilled/unskilled wage is generally 5 per cent and often
much less. The one outlier is Winchester (2008b), whose models claims a 27 per
cent decrease for New Zealand in the skill premium. This is the product of an
unusual experiment in which New Zealand returns to its agricultural roots, its true
comparative advantage, and in the process requires much more unskilled labour.
Ten of the 11 studies assume perfect competition and most have used an Armington
function to distribute demand between imports and domestically produced goods.
The changes are often quite large in these models: Theirfelder and Robinson (2002),
for example, cut the price of imports by half, and Cortes and Jean (1999) double
the size of emerging economies. Both get only a 1 per cent change in the skill
premium.
In a particularly clear example of how large-scale structure can make an enormous
difference in the way an economy responds to import penetration, Sadoulet
and de Janvry (1992) use a CGE to study two archetypal low-income economies.
In African countries, they note, cereal imports are non-competitive whereas in riceproducing
Asian countries they are competitive with domestic production. The
competitive/non-competitive import distinction was identified above as crucial to
the impact of trade liberalization on employment. The authors use the same model
(same closure and numéraire) with balanced fiscal intervention. Private and public
investment has a long-run effect on total factor productivity. The models consider
a 20 per cent increase in the price of cereals and animal products. In the African
case, the price elasticity of the demand for cereals is, on net, less than one, leading
to an increase in the import bill. Demand for local production falls and with it employment.
To restore macroeconomic balance, a real devaluation is introduced,
which reallocates labour to the agro-export sector. The devaluation steers resources
to larger farmers who are the most capable of producing agro-exports. As a result,
the distribution of income deteriorates, but a signal is sent to smaller farmers that
producing food crops for domestic production is now a less viable option.
The Asian scenario is entirely different in that the rising cereal price benefits
all farmers. There, cereal imports fall and macro-balance is achieved by way of a
revaluation of the exchange rate. Since both countries depend on export taxes as
the means to finance public-sector investment, the long-run effects are also the opposite.
The Asian countries lose output and employment as budgets shrink, while
the African countries, with rising trade taxes, have the resources to dedicate to public
investment. The employment outlook is thus more positive for Africa relative to
Asia in this simulation.
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